8th December 2015
A suit that fits – 10 things you should know about affordability
As affordability emerges as one of the most complex and divisive issues in collections, Frank Horvath, Managing Director of Link Financial Outsourcing, discusses how assessment tools can be used to find the right solution for the customer.
There’s no denying that affordability is one of the pre-eminent issues in financial services: it forms the main pillar of the FCA’s investigation into the credit card market, has been a defining issue in the debate over short term lending, and is central to the development of credit information resources across Europe.
In the world of collections, it is a dominant concern – the industry’s focus on conduct and customer outcomes has made gaining a correct view of affordability essential. What’s more, assessment has become perhaps the single most time consuming element of the collections process, and so has a critical effect on commercial performance.
With conduct standards still evolving under the FCA regime, and commercial pressures shifting at a similar pace, it’s safe to say that affordability checking will remain a hot topic. But what can we say for sure about how collections businesses will approach the issue in future?
One way or another, there has to be an Income & Expenditure check
As in any industry, the vast majority of a collections business’ customers are honest people – they want to repay their debts, and are keen to tell you the truth in order to get to a fair outcome. When dealing with people some time after an initial default, like Link often does, their circumstances may have changed, sometimes for the better, sometimes for the worse. Some Vulnerable customers are easy to identify and treat appropriately; others will only be identified through the use of an affordability checking tool. A good system will allow the company and customer to reach a fair outcome, which is generally done by setting an affordable and sustainable plan for those customers who can afford to pay something and that way, help them to get out of debt. It should also identify the outliers – those who will try and paint too bright a picture of their finances in order to get a debt paid off more quickly, or will exaggerate expenses to avoid paying. In these situations, the more customer data the agent has access to, the more likely an anomaly will be spotted. And as such, an affordability checking tool of one kind or another is essential. At the moment, an Income & Expenditure (I&E) check by telephone (or better still assisted by detailed forms filled out by the customer), supplemented by data held by Credit Reference Agencies, is the best tool available. While there is an argument over how fit for purpose I&E is in its current form, it’s a good place to start from.
I&E can sometimes help prevent the customer overpaying
As stated above, I&E isn’t about “catching out” customers who can afford to pay – in many cases, the check may indicate one thing, yet the customer is more optimistic – maybe they are confident of getting more work in the near future, or overtime, and are insisting on paying back a certain amount each month. Naturally, it’s hard to turn those funds away, and even harder to go against what the customer wants, but it’s important to remember that affordability checking cuts both ways, and can be a prompt for forbearance. Of course, compromises can be reached: maybe, in the case of a customer whose stated desire to repay overshoots what an I&E check recommends, no payment could be taken, with an agreement to speak again in the future and see if circumstances have improved before setting an arrangement in place.
Nevertheless, sometimes a completed I&E form should be taken as the start of a journey and not the end
An I&E check can alert an agent to the fact that a customer’s circumstances may be different to those presented initially, but it should not be a substitute for intuition or human judgement. Sometimes, an experienced agent will know that an arrangement isn’t sustainable, through picking up on clues in conversation with a customer that an automated process would miss or key words that would indicate the need to signpost the account for Free Money Advice. If an agent works through an entirely automated process with no recourse to their own judgement, there is a danger of a “Computer Says Yes” situation, where a customer is signed up to an unsuitable plan based on meeting a tick-list. So long as everything is clear and documented, there is nothing to fear in allowing human questioning and judgement into the affordability checking process.
I&E isn’t always convenient for customers
It’s not practical or desirable to undertake a full I&E at every instance of customer contact. For example, when making first contact with a customer by telephone, an attempt to conduct a full I&E interview may not be well-received. Repetition is not in a customer’s best interest, either. While it is important to keep track of a person’s changing circumstances, it’s still important to choose the right moment to conduct an I&E interview and do so thoroughly, to avoid frustration for all concerned. Giving the customer time to prepare often produces a better result, but some customers still refuse. Again, documenting what has happened and why is key.
Affordability doesn’t mean the minimum payment possible
Treating Customers Fairly does not mean always taking the most lenient approach possible – this is a fundamental misconception. As mentioned already, most people in debt want to get out of it and pay off all their creditors in a fair manner so that debts are cleared. It’s not fair on them to keep them there longer than they need to be. One criticism historically levelled at debt management companies is centred around the tendency to put customers on tiny monthly payments solely to keep them in debt management plans for longer and extract higher fees.
There is very little industry consensus on the calculation of affordable payments
Even once a company has accurate I&E information on a customer, or is using a standard approach like the Common Financial Statement, there is no rulebook regarding the appropriate level at which to set repayments. For example, how much “wriggle room” does a customer need above fixed expenditure? How much money should be left for unexpected expenses? Should this be calculated via a fixed or percentage amount? Indeed, what counts as income – do benefits count, and if so, which ones? What about temporary versus permanent income? Every organisation will have its own view on these issues, and it makes an industry-wide approach difficult.
Social and political change will alter the way we look at income
As society evolves, there are huge changes to the structure of peoples’ incomes, and this should prompt commensurate change in the way we look at incomes. Changes to benefits and tax credits, especially coming ahead of the minimum wage increase, should be on everyone’s radar. Furthermore, the increasing prevalence of “zero hour” contracts, while not the social evil some people make them out to be, is certainly having an impact on income patterns. Not everyone has a fixed salary every month these days, and that means there will often be a level of regular renegotiation in customer accounts – but the more thorough the original assessment, the more flexibility the customer should have to absorb month-to-month changes.
Affordability judgements may be affected by changes in the balance of commerciality against prudence
While at the moment, the advent of the FCA regulation of consumer credit has made conduct and forbearance the singular priority for many lenders, it’s not unrealistic to suggest the pendulum might begin swinging towards a more commercial stance as the economy improves. Basel III, and the UK’s other banking regulator the PRA, will demand prudence from creditors, maybe leading (among other things) to a different stance on recovering debts. While there is no danger of the collections industry returning to the cash-driven model of years gone by, it is more than possible that the culture will continue to evolve.
Development of vulnerable customer strategies will help
Development of the industry’s ability to identify and look after vulnerable customers will do a lot for best practice in affordability assessment for the wider population. If collections businesses are able to continue the progress they have made towards offering breathing space, signposting debt advice and providing specialist support to vulnerable customers, they will be left to address those customers who have only temporary problems, and to whom a short-to-medium term repayment solution is viable.
Financial education is vital
Finally, it can’t be ignored that affordability assessment would be much easier if customers had a more accurate understanding of it – and indeed financial management in general – themselves. Link itself regularly contributes to the Money Charity, helping to fund financial management workshops which, to date, have reached over 90,000 young people and adults. More needs to be done in schools: the national curriculum should teach about simple budgeting, bank accounts, direct debits, credit cards, credit scoring, and the implications of not paying off debts. In the collections process, we try to explain things to customers as well as we can. But that is hard to achieve on a phone call – and especially on a call that customers often find so uncomfortable. For most people, a call discussing debt is less welcome than a trip to the dentist, and to expect someone to be attentive to the finer points of financial management through all of that is a lot to ask for.